AgencyONE / 11200 Rockville Pike / Suite 500 / Rockville, MD / 20852 / 301-803-7500 / www.agencyone.net

In January of this year, we wrote a ONEIdea titled Life Insurance: The Solution to a Looming and Massive Transfer Tax Problem. The article discusses a September 2016 26 - 0 Senate vote to kill the ability for taxpayers to "stretch" their IRA's which could potentially tax qualified plan balances and IRA's to the tune of $5 trillion over the next generation. Later in the year, in June 2017, Gonzalo M. Garcia, CLU published an article in Advisor Magazine titled Life & Leverage: Three Challenges for Tapping Into a $10 Trillion Opportunity where he addressed using life insurance as a practice diversification tool for financial advisors working with clients on accumulation, distribution and generational wealth transfer planning. There are many reasons why life insurance as an accumulation, distribution and generational wealth transfer planning tool makes sense for the right clients. However, many of these clients do not understand the incredible tax benefit of life insurance as a financial asset. We have all heard of "asset allocation" and Harry Markowitz's Modern Portfolio Theory (MPT) - one of the most important and influential economic theories in the finance and investment communities. MPT quantifies the benefits of diversifying investments among different asset classes to reduce the overall risk of a portfolio while not necessarily giving up the potential for attractive returns. All investment advisors and financial planners employ asset allocation strategies in investment portfolio construction. As a financial advisor who understands life insurance, you are very conscious of the impact that taxes have during the accumulation and distribution phases on your client's portfolio and ultimately the generational transfer of these assets to the next generation. This is largely ignored by MPT and other investment portfolio theory. One of my favorite quotes by life insurance industry legend, Simon Singer, and he has many of them, is that a client's biggest expense is not his or her mortgage payment, healthcare or car payment, but rather what they pay in taxes. Most people don't think of taxes as an expense that can be managed but rather as an inevitable fact of life! Let's have a look at the three basic choices your clients have for making contributions to their financial portfolios during the accumulation phase as shown in the box below:

• Nest Egg #1 - Pre-tax contributions to 401(k) plans and IRA accounts • Nest Egg #2 - After-tax contributions to Mutual Funds, Stocks, Annuities and Real Estate • Nest Egg #3 - After-tax contributions to Municipal Bonds, Roth IRA accounts and Cash Value Life

Insurance

Retirement Distribution Planning – Part 1 Tax Diversification

July 21st

AgencyONE / 11200 Rockville Pike / Suite 500 / Rockville, MD / 20852 / 301-803-7500 / www.agencyone.net

During the accumulation phase, most client advisors and unadvised clients focus on maximizing contributions to nest egg number 1 (left). Getting an income tax deduction and deferring taxes on capital gains and dividends during the years leading up to

retirement is deemed a wise decision - ask any CPA.

However, everything changes during the distribution phase. John Hancock has an excellent client guide called "The Case for Tax Diversification in Retirement Planning". The illustration below from John Hancock summarizes the plan:

As you can see, a diversified tax strategy provides a much more tax-efficient income stream for the client. To accomplish this plan, the client must have understood the difference between these two scenarios during the accumulation phase, because regrettably, upon retirement, making a "tax reallocation" is not as easy as making an investment portfolio reallocation.

AgencyONE / 11200 Rockville Pike / Suite 500 / Rockville, MD / 20852 / 301-803-7500 / www.agencyone.net

Life insurance can be a very effective and powerful tool in the tax diversification conversation. The advantages of life insurance include:

• Income tax-free death benefits for generation wealth transfer • Tax-deferred growth • No retirement contribution limits • Tax-free distributions if the policy is not a modified endowment contract • No penalties for early access to cash • Access to death benefit for long term care or chronic illness costs when a rider is added

Finally, your client's retirement income from policy withdrawals and loans does not affect his or her:

• Income tax bracket • Medicare premiums • Capital gains • AGI (Adjusted Gross Income) or MAGI (Modified Adjusted Gross Income) • Social Security

Make sure to speak to your clients about the value of life insurance as an accumulation, distribution AND generational wealth transfer planning tool. In our next Advanced Markets ONEIdea, Retirement Distribution Planning - Part 2 we will discuss how this concept can further protect clients during retirement using a comprehensive distribution strategy based on sequencing of market returns

Please contact AgencyONE's Marketing Department at 301.803.7500 for more information

or to discuss a case!

AgencyONE / 11200 Rockville Pike / Suite 500 / Rockville, MD / 20852 / 301-803-7500 / www.agencyone.net

In our July 13th ONEIdea, we discussed the benefits of cash value life insurance from a tax diversification perspective. To summarize, clients who allocate assets earmarked for retirement distribution purposes into nest eggs that are taxed differently can benefit greatly from enhanced income during their retirement years. One of those nest eggs should be life insurance due to the potential tax-free nature of distributions from accumulated cash values. This ONEIdea takes a bit of a different approach, although the conclusion of setting aside retirement assets into a nest egg called "cash value life insurance" is the same.

We have all heard the following trick question ... "if the stock market (as measured by the S&P 500) goes down by 50% in a year, how much does the market have to go up in the following year to recover to the same level?" Many people will say "50%" as a quick answer, but that's not correct. Once these people think about the question for more than a few seconds, they realize that the answer is "100%". When there is a market correction during the accumulation phase and time is on your side, you can ride it out and wait for the inevitable market rebound, which has always happened. After the Tech Bubble of 2000, 2001, 2002, the market generated 5 straight years of positive returns and after the Great Recession of 2008, the market generated 8 straight years of gains.

The S&P 500 Returns for the 28-year period from January 1989 until December 2016 is shown to the left as they occurred.

Retirement Distribution Planning – Part II Sequence of Returns

Aug 2nd

S&P 500 12 Months

Returns Ending

31.69% 31-Dec-89

-3.10% 31-Dec-90

30.47% 31-Dec-91

7.62% 31-Dec-92

10.08% 31-Dec-93

1.32% 31-Dec-94

37.58% 31-Dec-95

22.96% 31-Dec-96

33.36% 31-Dec-97

28.58% 31-Dec-98

21.04% 31-Dec-99

-9.10% 31-Dec-00

-11.89% 31-Dec-01

-22.10% 31-Dec-02

28.68% 31-Dec-03

10.88% 31-Dec-04

4.91% 31-Dec-05

15.79% 31-Dec-06

5.49% 31-Dec-07

-37.00% 31-Dec-08

26.46% 31-Dec-09

15.06% 31-Dec-10

2.11% 31-Dec-11

16.00% 31-Dec-12

32.39% 31-Dec-13

13.69% 31-Dec-14

1.38% 31-Dec-15

11.96% 31-Dec-16

Starting Market Ending

Age Balance Return Distribution Balance

40 100,000$ 31,690$ -$ 131,690$

41 131,690$ (4,082)$ -$ 127,608$

42 127,608$ 38,882$ -$ 166,490$

43 166,490$ 12,687$ -$ 179,176$

44 179,176$ 18,061$ -$ 197,237$

45 197,237$ 2,604$ -$ 199,841$

46 199,841$ 75,100$ -$ 274,941$

47 274,941$ 63,126$ -$ 338,067$

48 338,067$ 112,779$ -$ 450,846$

49 450,846$ 128,852$ -$ 579,698$

50 579,698$ 121,969$ -$ 701,667$

51 701,667$ (63,852)$ -$ 637,815$

52 637,815$ (75,836)$ -$ 561,979$

53 561,979$ (124,197)$ -$ 437,782$

54 437,782$ 125,556$ -$ 563,337$

55 563,337$ 61,291$ -$ 624,628$

56 624,628$ 30,669$ -$ 655,298$

57 655,298$ 103,471$ -$ 758,769$

58 758,769$ 41,656$ -$ 800,426$

59 800,426$ (296,157)$ -$ 504,268$

60 504,268$ 133,429$ -$ 637,697$

61 637,697$ 96,037$ -$ 733,735$

62 733,735$ 15,482$ -$ 749,216$

63 749,216$ 119,875$ -$ 869,091$

64 869,091$ 281,499$ -$ 1,150,590$

65 1,150,590$ 157,516$ -$ 1,308,105$

66 1,308,105$ 18,052$ -$ 1,326,157$

67 1,326,157$ 158,608$ -$ 1,484,766$

AgencyONE / 11200 Rockville Pike / Suite 500 / Rockville, MD / 20852 / 301-803-7500 / www.agencyone.net

Had a 40-year-old client started with $100,000 in his or her IRA on January 1989, upon reaching retirement age of 67, the balance of the funds would be $1,484,766 assuming no further contributions (table above right). But what if the returns had not been in that order? What if we shuffled the returns from lowest (worst performing years) to highest (best performing years) or highest to lowest?

Interestingly enough, the ending balance after the 28-year period would be exactly the same. In fact, no matter how you randomize the returns, the ending balance will always be $1,484,766. See the table below.

As we mentioned in our prior ONEIdea, everything changes at retirement when the distribution phase begins. In fact, the sequence of returns during the distribution phase is critical to the long-term success of a client's retirement years. Unfortunately, neither the timing nor the sequence of returns is something that can be controlled. Let's assume the exact same sequence of returns as in the example above. If we take the ending balance of $1,484,766 and take $100,000 in distributions annually, the results are DRAMATICALLY different. As you see below, when the negative return years are experienced first, the client runs out of money in year 7, whereas the client that started with the positive returns ends up with over $16MM at age 95.

AgencyONE / 11200 Rockville Pike / Suite 500 / Rockville, MD / 20852 / 301-803-7500 / www.agencyone.net

The reason for this, of course, is that the client that starts with negative returns is selling into down markets, resulting in a loss that cannot be recovered from over time. The losses are "realized" upon the sale of the asset and the money is forever gone.

This is a rather dramatic and possibly ridiculous set of assumptions, but it proves a point. A more realistic analysis would be to look at what would have happened to this client had he or she suffered the unfortunate experience of retiring in the year 2000. Had that been the case, he or she would have run out of money by age 81 - 14 years into retirement. What if a client could time their distributions from IRA invested assets based on the market returns while having another nest egg of funds to draw upon when the markets have suffered losses? If the client, at age 40 as in our example, planned for it and had allocated part of his or her savings nest egg into life insurance he or she could time the distributions based on market returns. Let's look at the following example which is taken from an excellent marketing piece from AXA Financial called "Smooth Sailing on Uncertain Waters" which includes the chart shown below. In this case study, the hypothetical client, Tom, had purchased a cash value life insurance policy at age 40 in the amount of $500,000 with an annual contribution of $7,000 per year.

AgencyONE / 11200 Rockville Pike / Suite 500 / Rockville, MD / 20852 / 301-803-7500 / www.agencyone.net

In the years following a down market, Tom takes a distribution from his life insurance policy to cover his income needs during retirement. Please note that because a withdrawal or loan from a life insurance policy is not taxable, Tom can withdraw a lower amount of money than would otherwise be needed from his IRA.

As you can see, at age 85 Tom still has over $3.2MM in his retirement account, whereas had he been forced to take distributions from his IRA to fund his retirement needs in the years after a market loss, his account would have had a balance of $444,000. The difference is dramatic. It is important to note that we are not taking a stand on whether the cash value policy should be a universal life, whole life or indexed universal life. However, we do not recommend a variable life product in this situation because it is subject to the same positive and negative returns as in the IRA. AXA has created an illustration template in their life insurance proposal system that can be used to illustrate this sales concept. Let AgencyONE help you show your clients how they can realize significantly enhanced income during their retirement years by including the purchase of a life insurance policy as a part of their retirement savings plan.

Please call AgencyONE's Marketing Department at 301.803.7500 for more information or to discuss a case!